Are Investments in Foreign AMCs Safe?

The mutual funds in India were buffeted from the meltdown in the Wall Street and its impact on the Indian stock market. The foreign Asset Management Companies, or AMCs, had to deal with another factor. Many mutual fund investors in India were anxious whether their investments in the foreign AMCs were safe, particularly when Lehman went for bankruptcy and AIG’s fate was also not decided. There are worries on more Wall Street firms going under.

India has a sizable presence of global AMCs including Fidelity, HSBC, and Morgan Stanley. There are also foreign partners in AMCs, including Merrill in DSP Merrill Lynch, and Sun Life in Birla Sun Life. But the investors can be assured of their investments in foreign AMCs. Of course, their investment in mutual funds in India has the market risk per se from the fortunes of the stock market or debt markets.

The structure of the mutual funds safeguards the investors in case an AMC falls. The AMCs just manage the money. The creditors of the AMC do not have any right over the investors’ money. The AMC just acts as an investment manager of the mutual fund and gets fee-based income on it. The AMC takes investment decisions according to the scheme objectives.

Another entity, the Custodian, has the role of safekeeping of securities and it has no role in asset management. The Custodian is appointed by the Trustees, who are group of persons that have supervisory authority over fund managers. The Trustees of mutual funds in India also ensure that the fund managers stick to the trust deed and the assets of the funds are held safely. The Trustees also perform other supervisory role. The mutual fund is set up by a sponsor who works closely associated with the AMC. The regulations of the mutual fund regulator, Sebi, require that the Sponsor has to contribute a minimum percentage to the net worth of the AMC.

The Board of Directors of an AMC are normally elected each year at the annual meeting and act on behalf of the shareholders. So the different levels of supervision in a mutual fund delink your investment from that of the bankruptcy of the AMC. Still, we wish all the foreign AMCs a good luck as they battle the Wall Street storm. Of course, the creditors have the AMC have rights over the assets of the AMC like its offices. But not over the investors’ money.

Are all your worries over from investment in mutual funds? Not exactly, says French bank BNP Paribas. The global markets, including those in India, have not bottomed out yet, it says. But on the positives it says that it expects the Reserve Bank of India to hold rates for the next six months on concern over growth rates. Hopefully, some respite for realty, banking and other interest-rate sensitive counters. BNP Paribas sees Asian banks untouched from the global credit crisis.

As of now, the bank remains underweight on commodities. But still the French bank is worried over how the rescue plans of US Treasury Secretary Henry Paulson and Fed chief Ben Bernanke's will hold off another crisis.